"Play the Long Game."
May 18, 2020
By Mike Moreland
VP - Investments
“Play the Long Game.”
It denotes a willingness to absorb a short term setback in order to achieve a long term gain. There are few doctrines more appropriate for investors in today’s environment.
There’s no question we’ve seen a setback. Stock investors lost a third of their value in a little over a month, savings instruments plunged to near-zero returns, and unemployment rose to Depression levels.
Massive monetary intervention (and fiscal stimulus) rescued the stock market. An immutable truth of investing is that when the Federal Reserve acts, the financial markets respond well before the real world. We saw that beginning in late March; as of this writing the S&P 500 has retraced about half its peak-to-trough plunge. Prices are still down, but a manageable amount – in line with periodic corrections – not a lifestyle-changing destruction of wealth.
Is this price recovery too much too soon? Time will tell, but the market bounce thus far is certainly well ahead of today’s fundamentals – or even the prospects for improvement in the next several quarters. As such, financial assets will essentially mark time until a better sense of the ultimate recovery emerges. And, as state and local criteria for ending lockdowns evolve – with many stretching out potential end dates – the eventual recovery will be disjointed at best.
This isn’t the best setting for a developing bull market. Add to this trillions of dollars of new debt, the servicing of which will absorb a massive part of national wealth for decades to come. We are in a new environment, one which will affect investment decisions (and returns!) for some time to come.
All of this suggests more volatility ahead. In the short term, anything can happen – and usually does! The chart below, from J.P. Morgan’s Guide to the Markets, illustrates this. History shows that any given year can witness huge swings in asset prices. Over time, however, the range of annualized returns narrows, lending predictability to investment plans – particularly if a portfolio is well-diversified throughout.
This lesson – play the long game in your financial planning – is as valid today as any point in history. This time certainly is different – unprecedented, to use an overused term. But look at what took place in the nearly three-quarters of a century this chart represents. The Cuban Missile Crisis, the Vietnam War, double-digit inflation and interest rates, the bursting of the technology bubble, and September 11 and its aftermath were all unprecedented at the time.
If you believe as we do in the inherent strength of the U.S. economy and that its scientific and medical communities will enable us to overcome this crisis, stay invested and stay diversified. Near term, there is little question that today’s markets are ‘over their skis’. This suggests that heightened volatility will be with us. Rather than shy away from what might happen tomorrow, focus on what will take place over the long term.
We will move past this crisis. Be prepared for that time; do not find yourself playing ‘catch-up’. Talk with an advisor. Play the long game.